U.S. Markets closed

Johnson & Johnson (JNJ): Are Hedge Funds Right About This Stock?

Reymerlyn Martin

Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Johnson & Johnson (NYSE:JNJ).

Johnson & Johnson (NYSE:JNJ) investors should pay attention to an increase in support from the world's most elite money managers recently. JNJ was in 73 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 63 hedge funds in our database with JNJ holdings at the end of the previous quarter. Our calculations also showed that JNJ is among the 30 most popular stocks among hedge funds, ranking 26th.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Donald Yacktman

We're going to go over the new hedge fund action regarding Johnson & Johnson (NYSE:JNJ).

How are hedge funds trading Johnson & Johnson (NYSE:JNJ)?

At the end of the fourth quarter, a total of 73 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 16% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards JNJ over the last 14 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

JNJ_mar2019

The largest stake in Johnson & Johnson (NYSE:JNJ) was held by Fisher Asset Management, which reported holding $1463.1 million worth of stock at the end of September. It was followed by AQR Capital Management with a $857.8 million position. Other investors bullish on the company included Yacktman Asset Management, Adage Capital Management, and Two Sigma Advisors.

As industrywide interest jumped, key hedge funds have jumped into Johnson & Johnson (NYSE:JNJ) headfirst. Jet Capital Investors, managed by Matthew Mark, established the biggest call position in Johnson & Johnson (NYSE:JNJ). Jet Capital Investors had $29.5 million invested in the company at the end of the quarter. David Costen Haley's HBK Investments also initiated a $25.6 million position during the quarter. The other funds with new positions in the stock are Sander Gerber's Hudson Bay Capital Management, Charles Clough's Clough Capital Partners, and Parsa Kiai's Steamboat Capital Partners.

Let's go over hedge fund activity in other stocks similar to Johnson & Johnson (NYSE:JNJ). We will take a look at JPMorgan Chase & Co. (NYSE:JPM), Visa Inc (NYSE:V), Exxon Mobil Corporation (NYSE:XOM), and Walmart Inc. (NYSE:WMT). This group of stocks' market caps are closest to JNJ's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JPM,101,10016959,2 V,128,13066923,16 XOM,53,1613920,0 WMT,63,4444246,3 Average,86.25,7285512,5.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 86.25 hedge funds with bullish positions and the average amount invested in these stocks was $7286 million. That figure was $5212 million in JNJ's case. Visa Inc (NYSE:V) is the most popular stock in this table. On the other hand Exxon Mobil Corporation (NYSE:XOM) is the least popular one with only 53 bullish hedge fund positions. Johnson & Johnson (NYSE:JNJ) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. JNJ shares underperformed the market so far this year. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

Disclosure: None. This article was originally published at Insider Monkey.

Related Content